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Chapter 9: Q5Q (page 474)
Question:What method(s) might be used in the accounts to record a loss due to a price decline in the inventories? Discuss
The two methods to record decline in the value of inventories are recording inventories loss is the cost of goods sold method and loss method.
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Dover Company began operations in 2017 and determined its ending inventory at cost and at LCNRV at December 31, 2017, and December 31, 2018. This information is presented below. Cost Net Realizable Value 12/31/17 \(346,000 \)322,000 12/31/18 410,000 390,000 Instructions (a) Prepare the journal entries required at December 31, 2017, and December 31, 2018, assuming inventory is recorded at LCNRV and a perpetual inventory system using the cost-of-goods-sold method. (b) Prepare journal entries required at December 31, 2017, and December 31, 2018, assuming inventory is recorded at LCNRV and a perpetual system using the loss method. (c) Which of the two methods above provides the higher net income in each year?
What conditions must exist for the retail inventory method to provide valid results?
GROUPWORK (Retail, LIFO Retail, and Inventory Shortage) Late in 2014, Joan Seceda and four other investors took the chain of Becker Department Stores private, and the company has just completed its third year of operations under the ownership of the investment group. Andrea Selig, controller of Becker Department Stores, is in the process of preparing the year-end financial statements. Based on the preliminary financial statements, Seceda has expressed concern over inventory shortages, and she has asked Selig to determine whether an abnormal amount of theft and breakage has occurred. The accounting records of Becker Department Stores contain the following amounts on November 30, 2017, the end of the fiscal year. Cost Retail Beginning inventory \( 68,000 \)100,000 Purchases 255,000 400,000 Net markups 50,000 Net markdowns 110,000 Sales revenue 320,000 According to the November 30, 2017, physical inventory, the actual inventory at retail is $115,000. Instructions (a) Describe the circumstances under which the retail inventory method would be applied and the advantages of using the retail inventory method. (b) Assuming that prices have been stable, calculate the value, at cost, of Becker Department Stores’ ending inventory using the last-in, first-out (LIFO) retail method. Be sure to furnish supporting calculations. Problems 487 488 Chapter 9 Inventories: Additional Valuation Issues (c) Estimate the amount of shortage, at retail, that has occurred at Becker Department Stores during the year ended November 30, 2017. (d) Complications in the retail method can be caused by such items as (1) freight-in costs, (2) purchase returns and allowances, (3) sales returns and allowances, and (4) employee discounts. Explain how each of these four special items is handled in the retail inventory method.
Garcia Home Improvement Company installs replacement siding, windows, and louvered glass doors for single-family homes and condominium complexes. The company is in the process of preparing its annual financial statements for the fiscal year ended May 31, 2017. Jim Alcide, controller for Garcia, has gathered the following data concerning inventory. At May 31, 2017, the balance in Garcia’s Raw Materials Inventory account was \(408,000, and Allowance to Reduce Inventory to NRV had a credit balance of \)27,500. Alcide summarized the relevant inventory cost and market data at May 31, 2017, in the schedule below. Alcide assigned Patricia Devereaux, an intern from a local college, the task of calculating the amount that should appear on Garcia’s May 31, 2017, financial statements for inventory under the LCNRV rule as applied to each item in inventory. Devereaux expressed concern over departing from the historical cost principle. Net Realizable Cost Sales Price Value Aluminum siding \( 70,000 \) 64,000 \( 56,000 Cedar shake siding 86,000 94,000 84,800 Louvered glass doors 112,000 186,400 168,300 Thermal windows 140,000 154,800 140,000 Total \)408,000 \(499,200 \)449,100 Instructions (a) Determine the proper balance in Allowance to Reduce Inventory to NRV at May 31, 2017. (b) For the fiscal year ended May 31, 2017, determine the amount of the gain or loss that would be recorded (using the loss method) due to the change in Allowance to Reduce Inventory to NRV. (c) Explain the rationale for the use of the LCNRV rule as it applies to inventories
Presented below is information related to Rembrandt Inc.’s inventory, assuming Rembrandt uses lower-of-LIFO cost-or-market. (per unit) Skis Boots Parkas Historical cost \(190.00 \)106.00 $53.00 Selling price 212.00 145.00 73.75 Cost to distribute 19.00 8.00 2.50 Current replacement cost 203.00 105.00 51.00 Normal profit margin 32.00 29.00 21.25 Determine the following: (a) the two limits to market value (i.e., the ceiling and the floor) that should be used in the lower-of cost-or-market computation for skis, (b) the cost amount that should be used in the lower-of-cost-or-market comparison of boots, and (c) the market amount that should be used to value parkas on the basis of the lower-of-cost-or-market.
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